My aim in this paper to assess the possible and appropriate role for monetary finance of fiscal deficits . And I will argue that all the really important issues are political, since the technical issues surrounding monetary finance are already well understood (or should be) and that the technical feasibility and desirability in some circumstances of monetary finance is not in doubt . Monetary finance of increased fiscal deficit will always stimulate aggregate nominal demand: in some circumstances it will be a more certain and/or less risky way to achieve that stimulation than any alternative policy lever: and the scale of stimulus can be appropriately calibrated and controlled – there is no knife edge nonlinearity which makes dangerously high inflation inevitable.
But it is also clear that great political risks are created if we accept that monetary finance is a feasible policy option: since once we recognise that it is feasible, and remove any legal or conventional impediments to its use, political dynamics may lead to its excessive use. The most important question relating to monetary finance is therefore whether it is possible to construct a set of rules and responsibilities which will guard against its dangerous misuse, while still enabling its use in appropriate quantities and in appropriate circumstances. But the majority of this paper is still devoted to making the technical case, since the fact of technical feasibility and desirability is still not universally accepted within the economics profession, and needs to be if we are to move on to the crucial issues of political economy.
Paper presented at the 16th Jacques Polak Annual Research Conference
The Case for Monetary Finance – An Essentially Political IssueAdair Turner, Institute for New Economic Thinking
ht Ralph Musgrave
9 comments:
“But it is also clear that great political risks are created if we accept that monetary finance is a feasible policy option: since once we recognise that it is feasible, and remove any legal or conventional impediments to its use, political dynamics may lead to its excessive use.”
Well that depends on exactly who controls the printing press. It wouldn’t be hard to set up a system where some sort of monetary / fiscal council controlled the press with politicians having no say. At the other extreme, politicians could have complete control of the press.
But even if politicians control the press, strikes me the risks are no bigger than where there’s a non-independent central bank, as was the case in the UK between WWII and when the Bank of England gained a measure of independence in 1997. In that “non-independent” scenario, an irresponsible finance minister can borrow like there’s no tomorrow, and make sure that doesn’t raise interest rates because the finance minister controls the central bank which in turn controls interest rates. Or the finance minister can go even further and do some QE.
However, the UK (and other countries with non-independent CBs) didn’t have constant hyperinflation in those decades. As for the high inflation in the 1970s, that was a World-wide phenomenon, the causes of which are still disputed.
" It wouldn’t be hard to set up a system where some sort of monetary / fiscal council controlled the press with politicians having no say"
Yes. That's called a dictatorship. And clearly the economists are very much in favour of it - as long as they are in charge.
If the 'political dynamic' lead to 'excessive use' then that is what democracy is there to control. What Turner is inferring, essentially, is that democracy cannot control it - and therefore you need to leave it to Very Clever People of which he is obviously going to be one.
Politicians are permitted to wreck the economy - because they were elected by the people. It is for the people to un-elect such politicians and stop listening to their promises. And if they don't then business and commerce is going to have to adapt to that state of affairs - if they are to be considered as supporting democracy.
Ralph And Turner make the classic mistake of thinking that OMF or QE change anything. They dont and they cant. The elected reps who enact budgets and pass laws are necessarily the only authorities that can effect the macro economy. Congress or Parliament passes laws regarding taxation, spending, and regulation. Those policies may or may not result in a Govt deficit, but whether or not the Govt issues TSY CDs is irrelevant to the macro economy, QE definitely proves this point about reality. Yes, finanical assets will increase to their higher, natural level when TSY CDs are removed as a savings option for the non-Govt, but given the distribution of Financial assets, this doesnt matter to national spending and income on any meaningful scale.
What is it with people and thinking that TSY CD liabilities are some magical force that change everything wrt economics compared to reserve liabilities? One wonders. But then again, is magical thinking about economics really that surprising when 90% of humans partake in magical thinking because of religions.
FYI this line should read:
"The elected reps who enact budgets and pass laws are necessarily the only GOVT authorities that can effect the macro economy
Is Adair Turner basically in paradigm with MMT. I have thought so for a few years now. Even though he is establishment through and through.
There was an extremely knowledgeable and well written British chap knocking about Billy's Blog several years ago. I thought at the time it was someone associated with the BOE, maybe Danny Blachflower. Could it have been Adair? I sometimes wonder, probably just a minion.
Then again anyone actually understanding the business and doing their job properly (at a central bank or major financial institution) should be in paradigm with MMT. Groupthink and/or their received ideology might prevent them actually acting on it.
Absurd how austerity is discussed freely and implemented willy nilly while it is clear excessive, badly timed austerity will completely destroy the economy. While increased deficit spending is taboo at all times. No one mentions the double standards.
Carlos,
I agree: Turner’s paper could have been written by an MMTer. I.e. both Turner and MMTers argue that in a recession the state should print money and spend it, and/or cut taxes.
Auburn,
If the state prints $X and spends it on education and roads, strikes me that increases employment for teachers and road building contractors. What have I missed? And what has Turner missed? Plus the increased stock of base money in the hands of the private sector induces the private sector to spend more, which also increases agregate demand. Can’t see the flaw in that.
Neil,
As I’ve explained before, if democratically elected politicians decide to delegate a decision to the central bank or any other body, that is a democratic decision, not “dictatorship”. That decision can always be undone by a subsequent lot of politicians. Indeed the Labour Party in the UK is reviewing the remit of the Bank of England. If they decide to remove the independence that Gordon Brown gave the BoE I wouldn’t object.
"As I’ve explained before, if democratically elected politicians decide to delegate a decision to the central bank or any other body, that is a democratic decision, not “dictatorship”."
They are not talking about temporary delegation, and you are well aware of that. They are not running the Department of Work and Pensions and expecting the rules of tax credits to change with every parliament.
The line taken by the economists who support this approach is very clear. 'The independence of the Bank of England must be protected'. And the approach is baked into the EU treaty in Article 123, which attempts to be superior law and is capable of overriding the UK parliament.
The Bank of England should be merged with the Debt Management Office and put on a par with the DWP *as a department of government*, and Article 123 derogated from.
Until then the economists are definitely after a dictatorship, not a department of government. It is disingenuous to suggest otherwise.
Ralph-
"Auburn,
If the state prints $X and spends it on education and roads, strikes me that increases employment for teachers and road building contractors."
All state spending is necessarily "printing" money as all Govt spending results in an increase in bank deposits at either\and\or commercial\central banks. And yes of course, increases in Govt spending on education and roads will increase employment in those areas. Why would anyone ever disagree with that? Which is why I didnt. My point is that issuing TSY CD IOUs or reserve IOUs does not change the employment and income impacts. You dont get higher fiscal multipliers when TSY CDs are issued or not.
"What have I missed? And what has Turner missed?"
I would say that anyone who talks about OMF as changing anything serious at all economically has missed how QE demonstrates that TSY CD issuance or not is largely irrelevant.
"Plus the increased stock of base money in the hands of the private sector induces the private sector to spend more, which also increases agregate demand. Can’t see the flaw in that."
Yes deficits increase the incomes and wealth of the non-Govt and always have a positive fiscal multiplier. But again, issuing TSY CD IOUs or just reserve IOUs doesnt change anything. YOu are not any richer or poorer the day after you buy a TSY CD, just like you are not richer or poorer the day after you buy a RBS CD. Its irrelevant.
Well Auburn, you have a higher future income stream after buying at zero-risk (unless you are Rogoff or S&P/Fitch et al. who have to justify their work somehow...), AND an excellent collateral with no downside and a lot of potential upside (when the pyramid of "shadow-money" folds on asset price collapse, they fold on CD and govt treasuries which increase their value a lot).
So you will be richer in the future, at no-risk, that's why TSY paper is not as good as money, is even better and is the best collateral that exists (which there is a shortage of). there is a massive subsidy from the govt to the finance sector and overall private-sector in the form of paper which indirectly increases demand as it's a secured form of income. Money has zero maturity and does not yield interests, if you remove those issuances I'm pretty sure it would have a severe impact on the economy even without counting the collapse of the financial sector which pretty much needs it to survive in its current form.
This is also why CB's are trying to engineer an acceleration of the velocity of money through negative rates (as it's the equivalent of removing one of the qualities of those securities and forcing disinvestment in them).
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